5th October 2026
Scotland's economy is proving more resilient than might have been expected.
That is the encouraging message from the latest Fraser of Allander Institute Economic Commentary.
But there is another message buried beneath the headline figures.
Scotland is growing, but only slowly. The labour market is weakening, young people are being hit particularly hard, household costs remain under pressure and the Scottish Government is facing some difficult decisions about what it can actually afford to deliver.
In other words, Scotland's economy may be holding up, but it is not exactly powering ahead.
The Fraser of Allander Institute's latest forecast puts Scottish GDP growth at 1.1% in 2026, followed by another 1.1% in 2027 and 1.2% in 2028.
That is better than the Institute expected earlier this year, when its forecast for 2026 was 0.9%.
So there is some good news.
Scottish GDP increased by 0.7% in the three months to June 2026. The Scottish economy has also broadly kept pace with the UK, with both economies around 4% larger than they were in 2022.
But describing this as a strong recovery would be stretching the figures.
Growth of around 1% a year provides very little room for manoeuvre when governments are already struggling to pay for health, social care, housing, education and other public services.
And it is the labour market where the warning lights become more obvious.
The jobs picture is less comfortable
Payrolled employment in Scotland has been falling consistently since 2023.
The FAI estimates that there were around 23,100 fewer people in payrolled employment in July 2026 than in December 2023.
That decline is not evenly distributed.
Young people have been particularly affected, with significant falls among those aged 16 to 24 and an even larger decline among people aged 25 to 34.
Retail and hospitality have taken a particularly heavy hit.
Together, they account for around 8,600 of the payrolled jobs lost.
That matters because these industries provide many of the first jobs taken by young people entering the labour market.
For communities such as Wick and Thurso, this is more than an abstract Scottish statistic.
Retail, hospitality and tourism are important parts of the local economy. When employment in these sectors weakens, the consequences can eventually be seen in town centres, local spending and business confidence.
The cost-of-living problem has not gone away
Inflation has also begun to tick upwards again, with housing, energy and transport costs among the pressures identified by the FAI.
That creates an awkward situation.
An economy can technically be growing while households still feel that they are going backwards.
If wages rise more slowly than the cost of essentials, people have less money available for shops, pubs, restaurants, holidays and other discretionary spending.
That then creates another problem for businesses.
The result can be a rather unhelpful circle.
Households feel squeezed, spending weakens, businesses become cautious, employment suffers and government tax revenues are less buoyant than they would be in a rapidly growing economy.
Then comes the Scottish Budget
This is where the FAI's analysis becomes particularly important.
The Scottish Government has announced a wide-ranging five-year Programme for Government, with ambitions covering public services, health, housing, childcare, poverty and reform.
But ambitions are not the same thing as money.
The Institute is warning that the Scottish Government faces a difficult fiscal environment, including a forecast 1.2% real-terms fall in the resource budget in 2027-28.
That means the Government may have to decide which promises are genuinely affordable and which may have to be delayed, reduced or funded differently.
The UK Budget on 28 October will therefore be important, followed by the Scottish Budget on 3 December.
There is a temptation for governments to talk about economic growth as though it automatically solves financial problems.
Unfortunately, 1% growth does not generate an enormous pot of new money.
Can reorganising government save money?
The FAI also raises an interesting question about the Scottish Government's plans to reorganise local government.
Scotland currently has 32 councils.
The Government is considering moving towards a smaller number of regional authorities, alongside stronger community-level decision-making.
There is a reasonable argument for changing the present system.
Some services and economic development issues make more sense when considered across larger regions. Other decisions should arguably be made much closer to the communities affected.
But the Fraser of Allander Institute makes an important point.
Changing the structure of government does not automatically make government cheaper or better.
Reorganisation itself can cost money.
There can be disruption, new management structures, new systems and transitional costs. And promised savings may take years to materialise.
There is also a danger that Scotland becomes obsessed with deciding how many councils there should be rather than first deciding what each level of government should actually do.
That is particularly relevant to rural Scotland.
A structure that makes perfect sense around Glasgow or Edinburgh may not necessarily work in Caithness, the Highlands or the islands.
So is Scotland doing well or badly?
The answer is probably neither.
It is doing better than some of the gloomier predictions might have suggested.
But it is also facing some very real problems.
The economy is growing, but slowly.
Employment is weakening.
Young people are particularly exposed.
Households remain under cost-of-living pressure.
Businesses are cautious.
And governments are being asked to deliver more while having limited room to increase spending.
That is a difficult combination.
For Caithness, the national picture matters.
A Scottish economy growing at around 1% a year is unlikely to transform places such as Wick and Thurso by itself.
If anything, it makes the question of where future growth comes from even more important.
The challenge is not simply to keep the Scottish economy from shrinking.
It is to find ways of generating stronger and more widely distributed economic growth, particularly in places where traditional industries and public-sector employment can no longer be relied upon to provide the same level of economic security as in the past.
The latest Fraser of Allander report therefore contains a message that could easily be missed.
Scotland is not facing economic collapse. But neither can it afford to behave as though modest economic growth will solve its problems.
The real test now comes when political promises meet the financial reality.
The UK Budget on 28 October will provide part of the answer.
The Scottish Budget on 3 December will provide another.
And for households and businesses across Scotland, the question will be simple.
If the economy is growing, when will people actually start to feel better off?
The Fraser of Allander Institute's Q3 2026 Economic Commentary was published on 30 September 2026. The Institute describes its quarterly commentary as an independent analysis of Scotland's economy, covering growth, the labour market, poverty and inequality, and economic policy.
Read the full FAI report at
https://fraserofallander.org/publications/fai-economic-commentary-q3-2026/